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       lite.cnn.com - on gopher - inofficial
       
       
       ARTICLE VIEW: 
       
       /
       
       Here’s what would happen to the US economy if there are no rate cuts
       this year
       
       By Elisabeth Buchwald, CNN
       
       Updated: 
       
       4:57 PM EDT, Tue April 16, 2024
       
       Source: CNN
       
       Federal Reserve officials have been saying for months they need to see
       more convincing data demonstrating that inflation is on a sustainable
       path to 2% before they can feel comfortable cutting rates. Last
       month’s unexpectedly hot Consumer Price Index report is the exact
       opposite of that. That’s why Fed Chair Powell conveyed on Tuesday the
       central bank won’t be cutting interest rates any time soon.
       
       “The recent data have clearly not given us greater confidence and
       instead indicate that it’s likely to take longer than expected to
       achieve [2% inflation],” Powell said Tuesday in a panel discussion
       with Bank of Canada Governor Tiff Macklem. US stocks initially dropped
       after his signal that rates would stay higher for longer, and Treasury
       yields rose to new highs for the year before paring back.
       
       Markets, businesses and the White House have been laser-focused on the
       timing and number of rate cuts this year, yet the prospect seems to be
       slipping away. How would the US economy handle more months of
       painstakingly high interest rates? Not as well as it has thus far,
       experts say.
       
       Investors are banking on cuts
       
       When Fed officials initially penciled in three rate cuts at the end of
       last year, markets hit . The expectation at the time was the first of
       those cuts would come as early as March. Investors tend to prefer lower
       rates because that reduces the cost of borrowing which, in turn, can
       help boost profits. It also means investors have more money to pour
       into the market.
       
       Then, when progress on inflation started to stall leading into last
       month’s policy meeting, investors pushed back their timeline to June
       for the start of cuts. But investors were overjoyed when officials
       maintained their median forecast for three rate cuts this year at last
       month’s meeting, leading to multiple .
       
       However, that . After last week’s hotter-than-expected inflation
       data, the Dow, S&P 500 and Nasdaq Composite have each shed around 2%
       of their value.
       
       Even with the recent selloff, stock market prices still reflect the
       expectation the Fed will cut later this year, said Itay Goldstein, a
       finance professor at the University of Pennsylvania’s Wharton School
       of Business. “There is a risk there that if the Fed doesn’t
       decrease rates, market prices will decline.”
       
       That will have a spillover effect on the overarching economy, he told
       CNN. That’s because stock market declines could cause firms to delay
       investments or cut back on costs. For instance, Tesla announced it was
       as shares of the electric vehicle maker have been plummeting this year.
       
       Market declines can also make households “feel that they’re not as
       rich,” he added, which can also cause them to cut corners.
       
       Elevated recession odds
       
       Since the Fed held interest rates steady last year after 11 hikes that
       brought rates to the highest level in over two decades, higher for
       longer has been the central bank’s mantra.
       
       But the longer the Fed leaves interest rates higher means more pain
       could be inflicted on households and businesses, said Goldstein.
       
       Although it hasn’t quite been the case so far — especially
       considering the latest , which showed consumers continue to spend
       despite inflation and the highest interest rates in two decades —
       elevated interest rates tend to cause people to save more money rather
       than invest or spend it, which slows the economy. That risk will be
       elevated if the Fed doesn’t cut rates this year, he said.
       
       Already, the expectation that the Fed will keep rates higher has pushed
       up US Treasury yields significantly. For instance, the 2-year Treasury
       yield briefly hit 5% after Powell’s Tuesday remarks. That’s
       fueling .
       
       Ultimately, higher-for-even-longer rates “will increase borrowing
       costs across the economy, which is likely to have a negative impact on
       consumer spending, business investment, and the housing market,” said
       Brian Rose, senior US economist at UBS Global Wealth Management.
       
       But not everyone thinks cracks in the economy will widen if the Fed
       doesn’t cut rates this year. “We think the economy is strong enough
       that it doesn’t need cuts to avoid recession,” David Mericle, chief
       US economist at Goldman Sachs, said.
       
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